TYPES OF INSOLVENCY PROCEDURES

Transcription

1 MODULE ON INTRODUCTION TO INSOLVENCY PROCEDURES Presented By Jim Stafford Friel Stafford Corporate Recovery TYPES OF INSOLVENCY PROCEDURES Informal Scheme of Arrangements Members Voluntary Liquidation Examinerships Receiverships Creditors Voluntary Liquidation Provisional Liquidation High Court Liquidation Personal Bankruptcy

2 LEGISLATION AND OTHER REQUIREMENTS - Companies Acts Rules of Superior Courts. - Bankruptcy Act Other legislation: Conveyancing Acts etc. - High Court Precedents. - Statements of Insolvency Practice. - Ethical Guidelines. INFORMAL SCHEMES OF ARRANGEMENT Does not involve the High Court. No protection of the Court. Watch out for issues of reckless trading.

3 MEMBERS VOLUNTARY LIQUIDATION - Shareholders resolve by special resolution to wind up the company on the basis that the company will be able to pay its debts within 12 months. - Company s assets are realised. - Creditors paid in full. - Remaining assets are distributed to shareholders. EXAMINERSHIPS - Company placed under the protection of the High Court whilst its affairs are re-structured. - Process starts with the submission of an Independent Accountants Report. - Business must be viable. - Examiner formulates scheme of arrangement. - Proposals are put to each class of members and creditors. - The High Court cannot confirm the proposals unless they have been accepted by at least one class of creditor, and the proposals are not unfairly prejudicial to any interested party.

4 RECEIVERSHIPS - Usually appointed by charge holder under debenture over a company s assets. - Increasing use of fixed charge receiverships over an individual s or partnership s assets. - Receiver v/s Receiver and Manager v/s Statutory Receiver. - Receiver realises assets. May also investigate. CREDITORS VOLUNTARY LIQUIDATION - Most common form of corporate insolvency procedure in Ireland. - Shareholders initially appoint Liquidator, but creditors ultimately choose liquidator at a meeting of creditors. - Assets realised. - Full investigation carried out. - Liquidator Reports to ODCE. - Possible Section 150/160 Application. - Creditors paid in priority.

5 PROVISIONAL LIQUIDATION - High Court appoints Provisional Liquidator. - Main criteria is urgency: risk of assets being dissipated, or losing value quickly. - Provisional liquidator also takes charge of assets until his appointment is confirmed as a High Court liquidation. - Possible to convert a Provisional Liquidation to a creditors voluntary liquidation. COURT LIQUIDATION - High Court appoints liquidator, usually on foot of a creditor s petition. - Assets realised. - Full investigation carried out. - Liquidator reports to ODCE. - Extensive liaison with High Court Examiner. - Detailed reporting to High Court required. - Creditors paid in priority.

6 PERSONAL BANKRUPTCY - Usually official Assignee is appointed by the High Court. - Creditors meeting may appoint a Trustee. - Trustee realises assets. - Trustee investigates affairs. - Pays dividends. - Very lawyer intensive! NAMA & PERSONAL INSOLVENCY Module Presented by Jim Stafford Friel Stafford Corporate Recovery

7 CONTENTS OF MODULE - How personal exposure can arise - Overview of key personal bankruptcy legislation - What are NAMA s policies on debtors/guarantors? - Enforcement options against individuals available to NAMA - What will NAMA s attitude be on family homes? - Review of legislation to reverse Gifts - Informal/formal schemes of Arrangement - Review of Forum shopping IRISH BANKRUPTCY Worse than the ordinary miserable childhood is the miserable Irish childhood, and worse yet is the miserable Irish Catholic childhood Frank McCourt (Angela s Ashes) Worse than personal bankruptcy is the Irish personal bankruptcy

8 HOW PERSONAL EXPOSURE CAN ARISE Loans in personal names Personal guarantees Companies Acts: Reckless Trading (This is a real issue) Fraudulent Trading Failure to keep proper books and records Finance Act 2005 (PAYE on directors salaries) NAMA Act (Section 83) RECKLESS TRADING To knowingly act in a reckless manner = potential personal liability If your corporate business plan to NAMA shows that you are unable to re-pay the debt, you should not incur any further liabilities unless the company can discharge them. (NAMA may pay certain liabilities to avoid liquidation?) Duly appointed liquidator could obtain copy of Business Plan to NAMA. By definition, many companies going into NAMA are already insolvent.

9 FINANCE ACT 2005 Section 13 of the Act gives the Revenue Commissioners the power to assess and collect from controlling directors any PAYE which was deducted from their salaries but not paid over. Revenue are now starting to use this legislation. Conclusion: Companies should consider fully discharging PAYE liabilities before VAT liabilities. NAMA ACT 2009 Section 83: If a bank suffers a loss as a result of a debtor or guarantor failing to co-operate in terms of providing information on loans, then the debtor or guarantor shall be liable in damages to the bank.

10 RELEVANT LEGISLATION - Bankruptcy Act 1988 / Deeds of Arrangement Act Criminal Justice (Theft & Fraud Offences) Act Consumer Credit Act 1995/ Companies Acts VAT, Income Tax, Stamp Duty, Capital acquisitions Tax, Corporation Tax - Judgement Mortgage (Ireland) Acts 1850 and Conveyancing Act Ireland 1634/Property Partition Acts etc - Land and Conveyancing Law Reform Act National Asset Management Agency Act 2009 (S.211) -Succession Act Code of Conduct on Mortgage Arrears. -Case Law (including recent case law such as the Eugene Cuddy case). EFFECTS OF IRISH BANKRUPTCY Lose virtually all assets May not be a company director Adverse effect on certain professions Bankruptcy could literally last a lifetime! (But new reform on the way)

11 ACTS OF BANKRUPTCY -If debtor makes a fraudulent conveyance, gift, delivery or transfer of his property. -If, with intent to defeat his creditors, the debtor leaves the state. -If debtor files a Declaration of insolvency. -If a nulla bonna return is made. -If Bankruptcy Summons not satisfied within 14 days This is the most common -If a proposed Scheme of Arrangement fails. ROLE OF THE OFFICIAL ASSIGNEE -Similar to Liquidator. -Investigates assets. -Gathers information (Sheriff, solicitors, accountants, bankers, life assurance, postal re-direction etc.) -Reviews preceding years transactions. -Agrees creditors claims. -Pays dividends.

12 DEALING WITH THE FAMILY HOME - Joint v/s sole name. - Bankruptcy severs joint tenancies. - Obtains valuation. - Section 60 Application. - Mortgage. - Sale of property. (Spouse may purchase interest at discount of, say, 15%) - This may be a good time to go bankrupt so that Spouse may buy out 50% share cheaply! HOW TO EXIT BANKRUPTCY -Pay costs & all creditors in full -Pay costs and Preferential creditors and ALL creditors consent -Section 41 applies i.e. composition with creditors -Pay costs and Preferential creditors and at least 50% of unsecured -Bankruptcy has lasted 12 years

13 SCHEMES OF ARRANGEMENT - Debtor is granted protection from his creditors. - Prepares SOA. Holds meeting of creditors. - If three fifths in number AND value accept scheme, Court may approve it. (If NAMA consolidate all your loans, they may be the only creditor!) - If Scheme is not successful, then risk of being declared bankrupt. - Such schemes may be useful for dealing with multi-bank situations. PROPOSED LEGISLATIVE CHANGE? -Discharge period being reduced from 12 years to 6 years. -The Law Reform Commission is publishing a further report on other proposed changes by the end of the year.

14 NAMA S POLICIES ON DEBTORS - Pursue all debtors to greatest extent possible. - Work with debtors if: - optimal commercial decision, - they co-operate, - make full disclosure, - and are realistic about e.g. Lifestyle - Secure all unencumbered assets - Pursue assets transferred to third parties - Enforce personal guarantees to greatest extent possible Source: Frank Daly s presentation to Fianna Fail s conference 14 Sept 2010 WILL NAMA WRITE OFF DEBT? I know from my previous experience in the Revenue Commissioners that tax arrears are never definitively written off Revenue reserves the right to recover arrears at any stage if it emerges that a taxpayer recovers the capacity to repay his or her debts. It will be the same with NAMA. Source: Frank Daly s talk to CPA conference in June 2010.

15 NAMA S CATEGORISATION OF BORROWERS Compliant v/s Non Compliant Compliant: Provides full disclosure and works to agreed Business Plan. Compliant borrowers may subsequently be rewarded: e.g. Personal Guarantee/liabilities reduction and debt reduction. Non Compliant: Fails to meet NAMA strategy = enforcement likely Source: Graham Emmet s (Head of Lending) talk to Association of Property Bankers, 21 September 2010 IS NAMA S MESSAGE TO BORROWERS CLEAR? Message is crystal clear on non compliant borrowers: they will be rigorously pursued. I believe message is becoming clearer on compliant borrowers deals are likely to be done on personal guarantees/loan write off IF they can add value to the process but such borrowers will be cleaned out as much as possible!

16 AVAILABLE ENFORCEMENT PROCEDURES AGAINST INDIVIDUALS - Registration of judgment. - Sheriff - Examination order. - Committal order. - Garnishee order. - Judgment mortgage - Bankruptcy Petition - Appointment of a Receiver - Mareva Injunction JUDGMENT MORTGAGES Very expensive to enforce Court duty is 2.5% on sale price and 2.5% on existing mortgages Take a judgment mortgage registered against husband s 50% interest in investment property sold for 1m with an existing first mortgage of 500,000 Plaintiff will pay duty of 2.5% on 1m and 2.5% on 500,000, i.e. 37,500, out of its share of the equity of 250,000

17 NAMA S ATTITUDE ON FAMILY HOMES NAMA have made public statements to the effect that developers will not be allowed to stay in BIG houses. In practice, it is likely that compliant borrowers will be able to do some negotiation. Practical issue if house is jointly owned with spouse who has no NAMA exposure. Also practical issue if BIG house is in negative equity. NAMA unlikely to evict families from homes (unless loan is primary mortgage on house.) However, NAMA likely to take judgment mortgage or agree to take charge on house. Legislation to Reverse Gifts -Bankruptcy Act Conveyancing Act Ireland Land and Conveyancing Law Reform Act National Asset Management Agency Act 2009 (S.211)

18 BANKRUPTCY ACT Section 59: Transfers within 2 years of bankruptcy may be set aside. -Transfers within 5 years may be set aside unless the transferor can prove that at the time of transfer he was solvent excluding the value of the transferred asset. CONVEYANCING ACT IRELAND Effective legislation up to 30 November Conveyances and certain other transactions are void if they are made for the purpose of delaying, hindering or defrauding creditors.

19 LAND AND CONVEYANCING LAW REFORM ACT Effective 1 December Repeals Conveyancing Act Ireland Section 74 any conveyance of property made with the intention of defrauding a creditor or other person is voidable by any person thereby prejudiced. NATIONAL ASSET MANAGEMENT AGENCY ACT Section 211 gives powers to NAMA to void dispositions of debtors and guarantors. - Business Plan submitted to NAMA requires details of certain transfers of assets. - It is an offence to mislead NAMA. - In arriving at price paid to banks, NAMA are ignoring the values of any personal guarantors.

20 FRAUDULENT PREFERENCES -Fraudulent preferential payments made within 6 months of being adjudicated a bankrupt may be set aside. -Defence? If debtor was put under pressure to pay. ASSET PROTECTION Asset Protection planning is very similar to tax planning. Tax avoidance e.g. Pensions, BES, Section 23 are legitimate. You pay some taxes but sleep well at night. Tax evasion is illegal. You do not sleep well at night, and if you are caught you risk losing everything.

21 PERSONAL BUSINESS PLAN FOR CLIENT RELATIONSHIP ZONES WITH NAMA Workout Zone Facing reality Mutual wish for solution Open honest communication Realism Mushroom Zone - Feeding NAMA with manure (e.g. misleading accounts/ business plan) and keeping them in the dark. This may lead to NAMA anger. Knockout Zone - NAMA re-acts with extreme prejudice

22 IF ACTUAL BANKRUPTCY IS INEVITABLE -Pay off all preferential creditors (i.e. Revenue, rates) in order to facilitate quicker discharge - Consider Forum shopping e.g. moving to United Kingdom. Automatic discharge after 1 year in UK. Must establish Centre of Main Interest. COMI = Place where debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties -Watch out for new legislation in the pipeline. CONCLUSIONS - Unprecedented crisis = NAMA is evolving on a daily basis. - Sometimes aggressive litigation against borrowers will be the correct choice for NAMA (and the taxpayer!) - However, sometimes lateral thinking will produce a better result (particularly with creative property developers) - Concern that NAMA will simply outsource all debt collection to litigation solicitors. - Litigation solicitors = litigation solution = costs. -NAMA starting with clean slate = determined to get out tough message = first legal actions will be very tough. - Hopefully NAMA will evolve into a deal maker.

23 DEALING WITH STRESS Confucius say If you owe the Bank 10 million you have a problem, but if you are anxious about it you have two problems! Solution: Seek professional advice on financial issues Have medical check up Eat well Exercise daily Drink in moderation THANK YOU Jim Stafford Friel Stafford Corporate Recovery 44 Fitzwilliam Place Dublin 2 stafford@liquidation.ie Tel: